Taxes & Government Spending

Brainstorm: Make a list of all of the federal taxes you can think of, and another list of all of the state taxes you can think of.

Federal Taxes: Individual income tax Corporation income tax Employment tax Gift tax Excise taxes Estate tax

Minnesota State Taxes: Metropolitan landfill fee Mineral taxes MinnesotaCare Mortgage registry tax/deed tax Partnership tax Petroleum taxes Property tax REA membership tax S Corporation tax Sales and use tax Solid waste management tax Witholding tax Use tax for individuals Alcoholic beverage tax Cigarette and tobacco tax Contamination tax Controlled substance tax Corporate franchise tax Corporate franchise tax for nonprofit organizations (UBIT) Dry cleaner fees Estate and trust tax Fur clothing tax Hazardous waste generator tax Individual income tax Insurance taxes Lawful gambling tax

* Note that the number of minutes worked to pay federal and state taxes far exceeds any other spending category!

Why are taxes collected? What is a tax? A required payment to a local, state, or national government Why are taxes collected? Taxation is the primary way that the government collects money (revenue) that is used to provide goods and services to us.

Individual income taxes provide the largest share of federal revenue * Individual income taxes provide the largest share of federal revenue. Payroll taxes, which fund Social Security & Medicare benefits, are a close second. Because tax revenues did not cover spending in 2007, the government also borrowed money to cover the deficit.

Why do people often DISLIKE paying taxes? The government can coerce people. Most economic transactions depend on voluntary exchange. Government has the exclusive right to coerce individuals to pay taxes. 2. Costs are obvious; benefits are not. Government spending of tax dollars diminishes the link between payment and individual consumption. Usually, when consumers make a purchase, they see a direct benefit from the goods or services they receive. When people pay taxes, the benefits (from national defense or cancer research, for example) are often delayed, indirect, or spread out so thinly that people may see little benefit from their payments.

Characteristics of a Good Tax: Convenience Not overly complicated, predictable Efficiency Keep economic costs of tax system low Certainty Not arbitrary! (Prevents abuse) Equity Rich should pay more than poor Adam Smith’s Tax Maxims from “The Wealth of Nations”

Tax Equity Tax equity begins with the belief that taxation should be fair to all who are taxed. Economists often cite two principles in debates over tax equity:

Proportional Taxes Tax Base: Personal Income Definition: The percentage of income paid in taxes remains the same for all income levels. A 6% proportional income tax Leslie (a CEO) makes $350,000/yr and Tony (a nurse) makes $50,000/yr. Leslie pays 6% of her $350,000 ($21,000) Tony pays 6% of his $50,000 ($3,000) Example: Income tax in Estonia, Slovakia, & other European Countries

Progressive Taxes Tax Base: Personal Income Definition: The percentage of income paid in taxes increases as income increases. Example: U.S. federal income tax INCOME ($) TAX (%) 14,000-17,500 12 % 25,500-28,250 17 % 31,000-34,700 19 % 44,200-47,400 21 % 56,500-59,800 23 % 67,600-72,900 25 % 95,200-99,000 27 %

Regressive Taxes Tax Base: Specific good or service Definition: A single tax rate is applied to everyone. The percentage of income paid in taxes decreases as income increases. Although the tax rate remains constant… Higher-income households spend a lower proportion of their incomes on taxable goods and services. The proportion of their income spent on sales taxes is lower than that of lower-income households. Example: Sales tax

Where do your U.S. tax dollars go?

Where do your MN tax dollars go?

THE FEDERAL BUDGET

Federal Spending Mandatory (60%): Money that lawmakers are required by existing laws to spend on certain programs or to use for interest payments on the national debt Discretionary (40%): Spending about which government planners can make choices

Mandatory Spending About 2/3 of federal revenue is spent on interest and entitlement benefits.

Discretionary Spending About 1/3 of federal revenue is spent on discretionary spending, the largest category being defense spending.

Three possible budget outcomes: BALANCED BUDGET: total revenue = total spending BUDGET SURPLUS: total spending < total revenue BUDGET DEFICIT: total spending > total revenue …sometimes the President plans for one of these conditions…